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Thread: Buy a Business or Start One

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    Default Buy a Business or Start One

    I have a question about buying a business vs. starting one and I would love some insight, feedback and thoughts.

    It is an internet business. An ecommerce store that sells gift items via dropship. The items have a pretty good markup at about 40% on average and they wholesale from 30-100 dollars. But, this is not a unique business by any means. Still, it makes money. And has been around for 10+ years online (I dont know how much it made in previous years but from 2013 on it has been in the 40k-70k range. the from 70k to 40k is from a brick and mortar aspct of the store closing down as they focuses only in online sales. So now it is steady in the 40-50k range.)

    The business does about $4500 profit a month and the owner is looking for 170k. I think that is a bit high as that is above a 3x multiple. So, to me, I think a 125k is a more fair price.

    The current owner spends about 3-4 hours a day. I plan to continue my 9-5 job and only do work at night... seo, marketing, linkbuilding, new features, etc.

    The business does not have much overhead. The current owner only places orders with the dropshipper (which I will automate) and handles phonecalls (not sure how I will handle this, yet, but I need to figure that out) other than that there is occasional web development which I would handle and updating items which I will also handle, both of these can be after hours.

    So, the only iffy things are placing orders and being available for the occasional phone call. But again, I can automate the order placing and if I can figure out how best to handle the phones... Im in good shape I think.

    But, this all only matters if I can get the price down.

    Now, all that is just to give you some background.

    Here is what I am questioning. Since it is a dropship business it is easy to create--a very low barrier to entry. Between shopify and dropshippers I could create this store in no time. So I think, why not create the store and spend a fraction of 170k on marketing, link building, seo, etc. Lets say I allocated 100k for that just for argument sake. Could you generate the same kind of business... 4k a month?

    When I look at this business, I see it makes money, which is great. But it doesnt rank well for the big keywords (naturally, the big players have that cornered) and I dont see a whole lot of backlinks. There is no social media push. So I am thinking, where the heck are all these sales coming from? No social media outreach, fee backlinks, so-so ranking as far as I can tell. Cant a big budget catch up to that pretty quickly?

    I am sure there are things I am missing because, otherwise, anyone with 100k to spend would create a dropship business and rake in 40k a year no problem. But what am I missing? I am expecting someone here to give me an epiphany and say "but you're not understanding this.." or "but dont forget this..."

    It doesnt LOOK like it should be making 4k profit per month (about 10k total sales or more) but it is. If I could build this and generate the same results within a year or two I would... but I dont want to pass up a proven money maker only to struggle to make a fraction of it for the first few, maybe several, years.

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    4x gross profit seems a little rich. Actually, now that I've done some math below, 4x gross profit looks more like the seller is looking for a sucker.

    Another way of looking at it is "how long will it take to pay off/back if I allocate all available excess cash, including owner's benefit, to debt removal". Assuming 3K of free cash, based off your numbers above, it will take 56 months (170,000/3,000) if your payments went to only principle. However, you won't be able to finance the full purchase price so you need a down payment (unless paying cash) around 20-30% Personally, I wouldn't want to be in hock for more than 2 years on a deal like this, nor would I want to risk more than $5-10,000 and it needs to be able to pay for itself out of generated profits - after I take out a reasonable salary.

    I'd structure an offer similar to this if I was considering this one (using numbers provided above):
    $38,000 - 40,000 total offer
    $5-7,000 down (to show I am serious) but low enough to offset the risk from a lack of physical assets
    24 month maximum term for financing that the vendor must carry
    10% interest rate
    $1,522.78 per month until paid in full with no prepayment penalties and a right of first refusal if the vendor decides to sell his note during the 24 month duration.
    Last edited by Fulcrum; 12-08-2016 at 12:38 AM.
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    root Array Harold Mansfield's Avatar
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    I only have a few questions:

    Have you ever run an ecommerce website?
    Do you have the technical skills to run it and do the coding, maintenance, upgrades, as well as the knowledge and experience in marketing, SEO, and so on?

    If your answer is "yes" to both those questions, then you know what you're looking at and have the knowledge and skills to minimize your risk and maybe even grow it.

    If you answer is "no" to either question or both, use that $125k to get into something else or you're going to lose it all.

    If this is your first time out, I'm a big fan of starting your own. There is no better training and experience than building something from the ground up and being hands on through it's development. Even if you fail, you won't blow the whole $125k, and you'll be so much more knowledgeable the next time out.
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    If the previous owner has been running this website for over 10 years, he has built up a customer base. These may be satisfied customers that he gets from repeat business. The site probably is getting hits from his brick and mortor store if there was one. He did a lot of ground work to get his site ranking enough to get this much business. Ask to look at his schedule C. Ask him how he got his customers. He is an expert at his business. Ask lots of questions. He expects you to make a counter offer. See what happens. There is no guarantee that if you start a website you would get much business. He must be doing something right. Ask a lot of questions to him. Have a meeting after work. Take a few hours to talk to him.

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    You have quite a good choise anyway.But still,if you have such amount of money to invest,it's better to open your own store.At least,for the beginning.If you will buy this business,it's good from one side - you will have a stable proffit.But it costs too much and has a middle profitability.With your own store you can try to promote it by different methods and do not spend too much money for this.So you can learn on your mistakes and know what method is the best for your goods. I can even tell you one manufacturer,who won't ask you to pay for it's goods.You can just post their products in your store and will have a percent from order when someone purchase them.

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    It can be notoriously hard to create an online business these days, especially since the customer acquisition costs keep going up all the time. Startup often try to setup such dropship business models and many of them run on losses for a long time. On the other hand, your seller is indeed asking for an exorbitant price. Every seller builds in some buffer for negotiation so you should definitely try to negotiate. If you can't get him down to a good price, maybe you can just invest in his business without buying it outright, for a share of the profits. You invest money to help him grow his business - he gets higher revenues, you get some of his profits and both of you benefit.

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    Somethings to consider.
    1. If its online for 10+ years making money and survived the seasonal/cyclical up and downs of a business? Why not invest more and build the business even further?
    2. Is the owner open to an integrative approach where you merge or invest in phases, and slowly take over aspects of the business instead of an immediate out buy-out. Meaning, buy-in for X amount but you take over marketing, sales and support. Both of you remain as “transitional partners” with a clause for you to buy-out as you work together and he slowly hands over responsibilities to you. This would allow you to see where the actual traffic is coming from and confirm that the sales are real. The fact that the business does not have a social media channel seems odd to me.
    3. I agree with you that a drop shipping business is a very low barrier to entry business and one should be very cautious of buying out another drop-ship-type unless it complements a business you already have now and you plan to use the organic traffic and userbase to market other products.

    I think those three topics might help you with thinking the idea through some more.
    Last edited by Lets Web Now; 04-11-2017 at 06:06 AM.
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    I vote for starting from scratch, given the large budget you have. I would bet the seller started this dropship business you're considering for way less!

    Scenario 1: $20k to build out the infrastructure
    $20k to run FB ads for 6 months
    $10k SEO for 6 months
    $20k to hire for admin/mgmt duties for 6 months

    Scenario 2: Same minus $20k because you'll quit your FT job and run this yourself
    $75k left for 24 months of living/emergency expenses (probably won't need this)

    Either of these will get you to $4500/month within 6 months.

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